Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices 37153

15 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3Exchange Act Release No. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998) (SR–CBOE–97–

11) (order approving an increase in OEX position

and exercise limits).

4See NYSE Informational Memo Number 96–34

(November 8, 1996).

5See Exchange Act Release No. 34–38248

(February 6, 1997), 62 FR 6474 (February 12, 1997)

(adopting Risk-Based Haircuts); and CBOE Rule

24.11 Margins.

6See H.R. Rep. No. IFC–3, 96th Cong., 1st Sess.

At 189–91 (Comm. Print 1978).

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the self-regulatory

organization. All submissions should

refer to File No. SR-Amex-98–22 and

should be submitted by July 30, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.15

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18147 Filed 7–8–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40158; File No. SR–CBOE–

98–23]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to the Elimination of

Position and Exercise Limits for

Options on Broad-Based Indexes

July 1, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’ or ‘‘Act’’)1 and Rule

19b–4 thereunder,2 notice is hereby

given that on June 11, 1998, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II

and III below, which Items have been

prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to eliminate

position and exercise limits for broadbased index options. The current

reporting procedures, with slight

modifications, which serve to identify

large option holdings and hedging

information, will remain in place.

The text of the proposed rule change

is available at the Office of the

Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization included

statements concerning the purpose of

and basis for the proposed rule change

and discussed any comments it received

on the proposed rule change. The text

of these statements may be examined at

the places specified in Item IV below.

The self-regulatory organization has

prepared summaries, set forth in

sections A, B and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The CBOE is proposing the

elimination of position and exercise

limits for broadbased index options for

the reasons detailed below. The

Exchange will, however, still require

that member organizations file reports

with the Exchange in the event that they

maintain proprietary or customer

positions in excess of Exchange

established reporting thresholds in the

different broad-based index option

products.

Manipulation. The CBOE believes that

position and exercise limits in broadbased index options no longer serve

their stated purpose. The Commission

has stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition such

limits serve to reduce the possibility for

disruption of the options market itself,

especially in illiquid options classes.3

On the fifteenth anniversary of listed

index options trading, the Exchange

believes that the size of the market

underlying broad-based index options is

so large as to dispel any concerns

regarding market manipulation. To date,

there has not been a single disciplinary

action involving manipulation in any

broad-based index product listed on the

Exchange. The Exchange believes that

its fifteen years of experience

conducting surveillance of index

options and program trading activity is

sufficient to identify improper activity.

The CBOE believes that routine

oversight inspections of CBOE’s

regulatory programs by the Commission

have not uncovered any inconsistencies

or shortcomings in the manner in which

index option surveillance is conducted.

These procedures entail a daily

monitoring of market movements via

automated surveillance techniques to

identify unusual activity in both the

options and underlying stock basket

components. Moreover, the CBOE

believes that current NYSE Market on

Open and Market on Close procedures

facilitate the orderly unwinding of large

index program trades.4 Further, the

significant increases in unhedged

options capital charges resulting from

the September 1997 adoption of riskbased haircuts and the high margin

requirements applicable to these

products under Exchange rules serves as

a more effective protection than position

limits ever have or ever could.5

Competition. The Commission has

stated that ‘‘limits must not be

established at levels that are so low as

to discourage participation in the

options market by institutions and other

investors with substantial hedging

needs or to prevent specialists and

market-makers from adequately meeting

their obligations to maintain a fair and

orderly market.’’ 6 However, in today’s

market, the Exchange believes that

position and exercise limits severely

hamper CBOE’s ability to compete with

the OTC and futures markets. Investors

who trade listed options on the CBOE

are placed at a serious disadvantage in

comparison to the OTC market where

index options and other types of index

based derivaties (e.g., forwards and

swaps) are not subject to position and

exercise limits. Member firms continue

to express concern to the Exchange that

position limits on CBOE products are an

impediment to their business and that

they have no choice but to move their
37154 Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices

7The base limits for broad-based index options

are set forth in paragraph (a) of Rule 24.4. The

limits range from 25,000 contracts in OEX to

1,000,000 contracts on options based on the Dow

Jones Industrial Average (‘‘DJIA’’), which is a

contract that is based on one-one hundredth of the

value of the DJIA.

8Exchange Act Rule 15c3–1 requires a capital

charge equal to the maximum potential loss on a

broker-dealer’s aggregate index position over a +(¥)

10% market move. Exchange margin rules require

margin on naked index options which are in or atthe-money equal to a 15% move in the underlying

index; and a minimum 10% charge for naked outof-the money contracts. At an index value of 9,000

this approximates to a $135,000 to $90,000

requirement per each unhedged contract. This

compares to an approximate $36,000 requirement

for an equivalent index futures contract position.

9Exchange Act Release No. 39032 (September 9,

1997), 62 FR 48683 (September 16, 1997) (order

approving SR–CBOE–96–79).

10 Id.

11 Id. at 48685. The Commission notes that

approval of the elimination of position and exercise

limits for FLEX equity options for a two-year pilot

period and was based on several other factors

including, in large part, additional safeguards

adopted by the exchanges to allow them to monitor

large options positions.

12Currently only OEX and SPX are subject to

reporting requirements beyond those required by

Exchange Rule 4.13. The Exchange would expand

this revised reporting requirement to all broadbased index options.

13See Exchange Rule 4.13 Reports Related to

Position Limits.

14 15 U.S.C. 78f(b).

15 15 U.S.C. 78f(b)(5).

business to the OTC market where

position limits are not an issue.

Position and exercise limits restrict

legitimate options use. The Exchange

believes that the current base limit for

broad-based index options 7 is not

adequate for the hedging needs of

institutions which engage in trading

strategies differing from those covered

under the index hedge exemption policy

(e.g., delta hedges, OTC vs. listed

hedges). Moreover, the current index

hedge exemption, which requires a

daily monitoring of positions and

reports to the exchange is too

cumbersome. CBOE and member firm

compliance staff devote an inordinate

amount of time monitoring a firm’s

position, when in fact, the firm is more

than adequately capitalized to carry

such sizeable option positions. The

CBOE believes that, with the

elimination of position limits for these

products, staff resources could be better

utilized elsewhere.

Financial requirements. The

Exchange believes that financial

requirements imposed by the Exchange

and by the Commission adequately

address concerns that a member or its

customer may try to maintain an

inordinately large unhedged position in

a broad-based index option. Current

margin, and risk-based haircut

methodologies serve to limit the size of

positions maintained by any one

account by increasing the margin and/

or capital that a member must maintain

for a large position held by itself or by

its customer.8 It should also be noted

that the Exchange has the authority

under paragraph (h) of Rules 12.3 and

12.10 to impose a higher margin

requirement upon the member of

member organization when the

Exchange determines a higher

requirement is warranted. In addition,

the Commission’s net capital rule, Rule

15c3–1 under the Exchange Act,

imposes a capital charge on members to

the extent of any margin deficiency

resulting from the higher margin

requirement.

FLEX Equity options. In 1997, the SEC

approved the elimination of position

and exercise limits in FLEX Equity

options under a two-year pilot

program.9 To date, there have been no

adverse effects on the market as a result

of the elimination of position and

exercise limits. Member firms have

commented favorably on this change

and believe that it is the first step

towards eliminating position and

exercise limits in all option products. In

its release approving the elimination of

FLEX equity option limits for a two-year

pilot, period, the Commission stated

that the elimination of position limits

will allow the listed options markets to

better compete with the OTC market.10

[T]he elimination of position and exercise

limits for FLEX equity options allows the

Exchanges to better compete with the

growing OTC market in customized equity

options, thereby encouraging fair competition

among brokers and exchange markets. The

attributes of the Exchanges’ options markets

versus an OTC market include, but are not

limited to, a centralized market center, an

auction market with posted transparent

market quotations and transaction reporting,

parameters and procedures for clearance and

settlement, and the guarantee of the OCC for

all contracts traded on the Exchanges.11

Reporting requirements. The

Exchange will require that each member

or member organization that maintains

a position on the same side of the

market in excess of 100,000 contracts in

any broad based index option class, for

its own account or for the account of a

customer report certain information.

This data would include, but would not

be limited to, the option position,

whether such position is hedged, and, if

so, a description of the hedge and if

applicable, the collateral used to carry

the position. Exchange market-makers

would continue to be exempt from this

reporting requirement as market-maker

information can be accessed through the

Exchange’s market surveillance systems.

The Exchange proposes to increase the

reporting level to 100,000 contracts 12

from the current levels (i.e., 45,000 for

SPX and 65,000 for OEX) for the

following reasons. To date, information

collected shows that member firms and

customer accounts are hedged with

either futures, options on futures or

index options. This information can be

obtained either through in-house

surveillance systems, from the Chicago

Mercantile Exchange or by contacting

the member firm. Considering that the

CBOE currently lists sixteen (16)

different broad-based index option

products, imposing a uniform reporting

number will eliminate confusion. The

CBOE believes that an increase in the

reporting level to 100,000 contracts for

all broad based index products will

result in the collection of more

meaningful information, and will lessen

the administrative burden for member

firms and for the Exchange staff. In

addition, the general reporting

requirement for customer accounts that

maintain a position in excess of 200

contracts will remain at this level for

broad based index options.13 Last, it is

important to note that the proposed

100,000 contract reporting requirement

is above and beyond what is currently

required in the OTC market. NASD

member firms are only required to

report index option positions in excess

of 200 contracts and are not required to

report any related hedging information.

2. Basis

The Exchange believes that the

proposal is consistent with Section

6(b)14 of the Act, in general, and Section

6(b)(5)15 of the Act, in particular, in that

it is designed to prevent fraudulent and

manipulative acts and practices, to

promote just and equitable principles of

trade, to foster cooperation and

coordination with persons engaged in

facilitating transactions in securities,

and to remove impediments to and

perfect the mechanism of a free and

open market and a national market

system.

B. Self-Regulatory Organization’s

Statement on Burden on Competition

The Exchange believes that the

proposed rule changes are consistent

with Section 6(b) of the Act in general,

and further the objectives of Section

6(b)(5), in particular, in that they are

designed to promote just and equitable

principles of trade and to protect

investors and the public interest.
Federal Register / Vol. 63, No. 131 /Thursday, July 9, 1998 / Notices 37155

16 17 CFR 200.30–3(a)(12).

1 15 U.S.C. 78s(b)(1).

2 17 CFR 240.19b–4.

3CBOE Rule 4.12 states: ‘‘no member shall

exercise, for any account in which it has an interest

or for the account of any customer, a long position

in any options contract where such member or

customer, acting alone or in concert with others,

directly or indirectly has or will have exercised

within any five consecutive business days aggregate

long positions in any class of options dealt in on

the Exchange in excess of’’ the established limits set

by the Exchange.

4Exchange Act Release No. 39489 (December 24,

1997), 63 FR 276 (January 5, 1998) (CBOE–97–11)

(order approving an increase in OEX position and

exercise limits).

C. Self-Regulatory Organization’s

Statement on Comments on the

Proposed Rule Change Received From

Members, Participants, or Others

Written comments on the proposed

rule change were neither solicited nor

received.

III. Date of Effectiveness of the

Proposed Rule Change and Timing for

Commission Action

Within 35 days of the date of

publication of this notice in the Federal

Register or within such longer period (i)

as the Commission may designate up to

90 days of such date if it finds such

longer period to be appropriate and

publishes its reasons for so finding or

(ii) as to which the self-regulatory

organization consents, the Commission

will:

(A) by order approve such proposed

rule change, or

(B) institute proceedings to determine

whether the proposed rule change

should be disapproved.

IV. Solicitation of Comments

Interested persons are invited to

submit written data, views and

arguments concerning the foregoing,

including whether the proposed rule

change is consistent with the Act.

Persons making written submissions

should file six copies thereof with the

Secretary, Securities and Exchange

Commission, 450 Fifth Street, N.W.,

Washington, D.C. 20549. Copies of the

submission, all subsequent

amendments, all written statements

with respect to the proposed rule

change that are filed with the

Commission, and all written

communications relating to the

proposed rule change between the

Commission and any person, other than

those that may be withheld from the

public in accordance with the

provisions of 5 U.S.C. 552, will be

available for inspection and copying in

the Commission’s Public Reference

Room, located at the above address.

Copies of such filing will also be

available for inspection and copying at

the principal office of the self-regulatory

organization. All submissions should

refer to File No. SR–CBOE–98–23 and

should be submitted by July 30, 1998.

For the Commission, by the Division of

Market Regulation, pursuant to delegated

authority.16

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 98–18146 Filed 7–8–98; 8:45 am]

BILLING CODE 8010–01–M

SECURITIES AND EXCHANGE

COMMISSION

[Release No. 34–40160; File No. SR–CBOE–

98–25]

Self-Regulatory Organizations; Notice

of Filing of Proposed Rule Change by

the Chicago Board Options Exchange,

Inc., Relating to a Change in Position

and Exercise Limits for Equity Options

July 1, 1998.

Pursuant to Section 19(b)(1) of the

Securities Exchange Act of 1934

(‘‘Exchange Act’’ or ‘‘Act’’) 1 and Rule

19b–4 thereunder,2 notice is hereby

given that on June 8, 1998, the Chicago

Board Options Exchange, Inc. (‘‘CBOE’’

or ‘‘Exchange’’) filed with the Securities

and Exchange Commission

(‘‘Commission’’ or ‘‘SEC’’) the proposed

rule change as described in Items I, II

and III below, which Items have been

prepared by the self-regulatory

organization. The Commission is

publishing this notice to solicit

comments on the proposed rule change

from interested persons.

I. Self-Regulatory Organization’s

Statement of the Terms of Substance of

the Proposed Rule Change

The CBOE proposes to increase the

position and exercise limits on equity

options traded on the Exchange to three

times their current levels.

The text of the proposed rule change

is available at the Office of the

Secretary, CBOE and at the Commission.

II. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

In its filing with the Commission, the

self-regulatory organization included

statements concerning the purpose of

and basis for the proposed rule change

and discussed any comments it received

on the proposed rule change. The text

of these statements may be examined at

the places specified in Item IV below.

The self-regulatory organization has

prepared summaries, set forth in

sections A, B and C below, of the most

significant aspects of such statements.

A. Self-Regulatory Organization’s

Statement of the Purpose of, and

Statutory Basis for, the Proposed Rule

Change

1. Purpose

The CBOE is proposing to increase the

position and exercise limits for equity

options traded on the Exchange to three

times their current levels. Currently,

Rule 4.11 subjects equity options to one

of five different position limits

depending on the trading volume and

outstanding shares for the underlying

security. Rule 4.12 establishes exercise

limits for the corresponding options at

the same levels.3 The limits are: 4,500;

7,500; 10,500; 20,000; and 25,000

contracts on the same side of the

market. Under the proposed changes the

new limits will be: 13,500; 22,500;

31,500; 60,000; and 75,000. The

Exchange believes sophisticated

surveillance techniques at options

exchanges adequately protect the

integrity of the markets for the options

that will be subject to these increased

position and exercise limits.

Manipulation.

The CBOE believes that position and

exercise limits, at their current levels,

no longer serve their stated purpose.

The Commission has stated that:

Since the inception of standardized

options trading, the options exchanges have

had rules imposing limits on the aggregate

number of options contracts that a member

or customer could hold or exercise. These

rules are intended to prevent the

establishment of options positions that can

be used or might create incentives to

manipulate or disrupt the underlying market

so as to benefit the options position. In

particular, position and exercise limits are

designed to minimize the potential for minimanipulations and for corners or squeezes of

the underlying market. In addition, such

limits serve to reduce the possibility for

disruption of the options market itself,

especially in illiquid options classes.4

On the twenty-fifth anniversary of listed

options trading, the Exchange believes

that the existing surveillance procedures

and reporting requirements at options

exchanges and clearing firms that have

been developed over the years are able

to properly identify unusual and illegal

trading activity. In addition, the CBOE

believes that routine oversight

inspections of CBOE’s regulatory

programs by the Commission have not

uncovered any material inconsistencies

or shortcomings in the manner in which

the Exchange’s market surveillance is

conducted. These procedures entail a

daily monitoring of market movements